What to look for in a house hack in today's market.

Question

Hello Bigger Pockets people! I am new to the real estate investment space, and after a few books and hours of YouTube videos, I am knee-deep in my search for an FHA-financed, multi-family house hack in the greater Pittsburgh area. With interest rates as high as they are and home prices elevated as well, I'm not sure where my expectations should be as far as cash-on-cash return and total ROI percentages. I'm interested to hear what more experienced investors have to say. I've heard some people say that cash flow isn't necessary while you're living in the home and to analyze the property when you move out and it's fully rented, I've heard from others that cash flow is essential and they expect a 10% cash on cash return and over 25% of total ROI or else it is not worth it. I think the viewpoints of my fellow investors will help me come to my own conclusions about what I can and cannot accept in a deal so pleas, share your thoughts!

Julien Jeannot · Answer

I cashed flowed on my first ouse hack BUT....

1. I was negative cash for a few years (still less then paying market rent)

2. I rehabbed then raised rents... still negative

3. I kept raising rents every year THEN I cash flowed living in one unit

4. Metrics? ... those are great for analysis paralysis. Figure out what your goal is, then attached the relevant metrics to it. Cash on Cash and ROI are great metrics for syndicators or RE agents selling you their products. I generally don't recommend getting bogged down on those metrics for house hackers.

My goal was to:

1. Find a safe place to live within commuting distance from work, garage, 2bed, 1+ bad, 1,000 sqft, and a yard.

2. Not to rent and start taking advantage of: principal pay down, tax benefits, YOY appreciation, and subsidized house via a tenant paying me rent

3. Fund a cosmetic fixer upper.

By all the recommended year 1 metrics, I failed. However, my results over the long term was 2x equity and $1,500/mo positive cash flow. Was it the "best" ... probably not and I don't care. It was a base hit that allowed me to start my journey and eventually exit the corporate world.

Noah Bacon · Answer

Hey Ian!I am on my second house hack currently, and had 2 different views on my ROI when I was analyzing the properties.On my first property, cash flow was a major factor as I was all in on the mindset of breaking even or cash flowing while living in the property. I knew the property would cash flow when moving out, so I was in a bit of a rush to lease it out and move onto the next one. While living there, I was very frugal and saved every dollar I could to fund a down payment on my second property. On my second property, cash flow/ROI were not my major drivers in my decision to house hack again. This time around, I chose to invest in a place that would be more comfortable personally and looked for a property to put some work into. My strategy is buy and hold for the long term, so I was a lot more comfortable the second time around passing up on properties that had better returns in less desirable locations knowing they will appreciate over time. You can invest for cash flow much more aggressively while house hacking, but you will have to consider giving up more in your personal life to achieve a greater return.

Daniel McDonald · Answer

Hey Ian,

I haven't heard anyone cash flowing while house hacking in a long time UNLESS they create serious value add. For example, you find a duplex that can be converted to a triplex, or you finish a basement into a STR suite. There's a way to cash flow on every property but it's going to depend on your purchase price, and how much creativity/discomfort you're willing to go through. You may not have the money it takes to finish an entire basement or build an ADU. In my opinion, the people who wait around for the perfect deal never get started. The best thing about house hacking is it's forgiving. I am on my second one just North of Boston and it's been great for me. Have either of them been a homerun? No, but I've got two base hits that are appreciating like crazy and increasing my net worth. My advice is don't kill yourself over finding the perfect deal. I've never met anyone who has on their first purchase. Instead, focus on lowering your cost of living now and having a cash-flowing property after you move out.

Jeremy Taggart · Answer

@Ian Zuber having done 6 house hacks myself now at this point in the Pittsburgh area, IMO the move right now with the FHA loan is getting a 3-4 unit property as high priced as you can while still hitting the self sufficiency test. This will basically make sure it's at least break even from a cash flow perspective after you move out, while taking advantage of the low down payment leverage of the FHA loan. The days of significant cash flow from day 1 using an FHA loan might not be coming back so the focus shifts to principal paydown, appreciation, and depreciation/tax benefits. Looking at the overall ROI of all 4 wealth generators of real estate compared to the low down payment this will typically give you the highest ROI. Have to think more long term than day 1 cash flow now that even the lower income areas aren't really cash flowing that much more than the more desirable areas.

This goes for properties on the market. If you can do some off market lead gen and find a home run deal, then you very will might be able to get significant cash flow. But that's going to require more work obviously. I am just speaking from an agent/investor point of view working with clients to help them buy on the market and buying house hacks myself.

Jonathan Greene · Answer

There is some great advice above on how to do it and as said, FHA house hacking right now is hard and will depend on your price point and money down. If you choose to do 3.5% you will be negative until you leave so you should really be focused on what the numbers will look like when you leave.

If you are single or a couple, the best looking strategy is to look for uneven multis. Many multis are standard copies, meaning 2 over 2, or 2 by 2 side by side, but your best bet to maximize your return is to look for odd ones, like 1 bedroom over 3, etc.

Also, if your area supports a 2+1 (harder to unlikely with FHA) which is a 2-family with a basement or attic unit that can't be rented out, but can be lived in by the owner, usually without a stove, that could be an option.

Crystal Smith · Answer

To come to your own conclusions you should establish a goal for your business because it is a business. How much risk are you willing to take, and what kind of hurdle rate (or ROI) do you want to establish? Do you want to bet on appreciation or strictly cash flow?

If you're a low-risk type of investor and want more certainty then you should be looking at opportunities with a CAP Rate of 5% or less.  If you're a high-risk type of investor then look for the 10% and up type of opportunities.  If you want to bet on appreciation then you should pursue opportunities where the property may break even, even when fully occupied.  If you want cash flow now then you may have to consider purchasing a distressed property and using an FHA 203K or equivalent loan to update the property, have some equity, and cash flow the property.  We love the purchase & renovate approach because you can control the numbers.

While trying to figure that out you should also evaluate the market that you're working in or want to work in to see if the goals you have established are possible.

What to look for in a house hack in today's market.

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